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Experts: Uhuru tax ‘breaks’ to hit ordinary Kenyan hard

Wednesday April 8 2020

A supermarket staff arranges milk at Tumaini Supermarket in Nyalenda, Kisumu on May 9, 2017.

A supermarket staff arranges milk at Tumaini Supermarket in Nyalenda, Kisumu. PHOTO | FILE | NATION MEDIA GROUP 

PAUL WAFULA
By PAUL WAFULA
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The cost of bread, milk, cream, cooking gas, fuel, mosquito nets, vaccines and a host of medical products is expected to shoot up in an ironic twist of a government giving from one hand as it takes with the other following the introduction of 2020 Amendment Bill.

The amendments also include excise duty, fees and other charges in computing the taxable value for fuel.

The bill introduces Value Added Tax on Liquefied Petroleum Gas (LPG).

The promise to increase the cost of fuel and LPG negates the reduction of VAT from 16 to 14 per cent.

And at a time tourism is hurting the most, government technocrats who drafted the bill and forwarded it to the National Assembly want the industry slapped with an even bigger tax burden.

The proposed law wants to tax goods for direct and exclusive use for the construction of tourism facilities, recreational parks of 50 acres or more, convention and conference facilities previously exempted from VAT.

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Entry fees to national parks, reserves as well as services of tour operators, excluding in-house supplies – which were tax exempt – will also attract 14 per cent VAT if lawmakers approve the proposals.

Experts say the inclusion of excise duty and other charges in the computation of VAT on fuel will significantly increase the cost of petroleum products, negating the decision to charge a lower VAT rate of eight per cent.

“This will trigger an increase in prices of most products that depend on fuel for their manufacture as well as thousands of homesteads and hotels that rely LPG for cooking,” experts at international audit firm KPMG say in their analysis of the new law.

This means the government gave tax relief to citizens and companies only to take away the same benefits through other measures.

KPMG, analysts at the Law Society of Kenya (LSK) and other tax experts say the drafters of the 2020 Tax Laws (Amendment Bill) appear to be reading from a script that is different from the one prepared by State House.

“It was expected that the bill would only cover the implementation of the changes proposed by President Uhuru Kenyatta. Our review of the bill, however, shows  otherwise,” LSK President Nelson Havi says in a letter to the Clerk of the National Assembly.

“We note that there is introduction of significant and far-reaching measures which will impact the public negatively,” he adds, listing a dozen instances that need to be critically looked at.

The bill has changed the definition of ordinary bread to mean bread containing only wheat flour, sugar, salt, yeast, fat or oil, improvers, preservatives and water.

It also proposes to exempt the supply of ordinary bread from VAT.

The expanded definition implies that bread from any other ingredients will attract VAT.

“The supply of ordinary bread is zero-rated and the proposal to move it to exempt status will increase the price of bread as the input VAT incurred in manufacturing will not be claimable,” the experts say.

“The proposed change is untimely, especially when many Kenyans face difficulties as a result of the coronavirus-related economic downturn.”

The amendments seek to tax bonuses, overtime and retirement benefits, currently exempted.

Employees whose monthly taxable employment income before bonus and overtime allowances did not exceed Sh12,298 would not be subject to tax.

Its has increased from zero to 14 per cent VAT payable on all inputs and raw materials, whether produced locally or imported, supplied to manufacturers of agricultural pest control products upon recommendation by the Cabinet Secretary for the time being responsible for agriculture.

Agricultural pest control products, the supply of LPG – including propane – some fertiliser, mosquito nets, biogas as well as tractors that were previously exempted from tax will now attract VAT.

The bill proposes to increase the withholding tax rate on dividends paid to non-residents from 10 to 15 per cent, clawing away the benefit from reduction of the corporation tax rate.

Transporting goods by non-residents will attract higher withholding tax of 20 per cent.

“The amendment is also untimely as transport is critical, especially during the current economic downturn,” KPMG experts add.

Foreigners operating in Kenya through subsidiaries or branches will now subject to higher tax rates compared to local firms.

The bill has reversed the gains made in the fight against plastics.

It revised the corporation tax rate on companies operating plastic recycling plants upwards to 25 per cent, same level as resident firms dealing in other goods and services.

“This erodes the efforts the government made in the recent past to protect the environment through deliberate measures like banning the use of plastic bags and promoting the setting up of recycling plants,” the KPMG experts say.

The bill wants to do away with the 30 per cent electricity rebate that was awarded to manufacturers in January 2019.

KPMG says the introduction of the rebate was good for manufacturers as it reduced their electricity costs.

The rebate was part of the government’s incentive to promote manufacturing in line with its Big Four Agenda.

The reversal will, however, be a significant blow to manufacturing, which had enjoyed the rebate for a year.

It also goes against the spirit of motivating local manufacturers to get into the game at a time imports are rocked by worldwide  disruptions.

KPMG says the new measures have handed a big blow to listed companies. The law has disallowed tax purposes for expenses incurred by the listed entities and companies looking to list at Nairobi Securities Exchange (NSE).

Among the disallowed expenses are legal and other incidental costs relating to the authorisation and issue of shares for purchase by the public and rating expenses incurred for the purpose of listing at the NSE.

In addition, the bill proposes to remove preferential tax rates for newly listed companies, which ranges between 27.5 and 20 per cent.

 The audit company says ordinarily, legal and incidental costs incurred during listing or where a company is looking to raise additional capital at the NSE can be significant.

“Disallowing expenses for corporation tax will increase the bill of companies looking to list or float shares at the NSE. This will diminish the attractiveness of the NSE for companies wishing to list their shares,” the KPMG experts say.

The bill also wants to disallow deduction subscriptions and entrance fees to trade unions that have elected their income to be treated as taxable income, club subscription fees and approved expenses on construction of public schools, hospitals, roads and other social infrastructure.

The disallowing of expenses relating to social infrastructure projects will be a blow to target communities.

“Potential donors will be discouraged from investing in social welfare projects if the expenses will not be allowable against their income for tax purposes. This is also not consistent with provisions allowing deduction of charitable contributions made in cash,” they say.

KPMG says if the government is keen on cushioning businesses against the economic shocks arising from the Covid-19, it should retain the previous capital allowances and provide additional incentives.

The bill proposes to revise the definition of qualifying interest.

Previously, it only referred to interest received by a resident individual from a bank, building society, Central Bank of Kenya and from housing bonds.

The amended law seeks to classify any interest received by a resident individual as qualifying. As such, the withholding tax on such interest shall be the final tax.

KPMG says if passed, the amendment will encourage individuals to save and invest in debt instruments issued by other non-financial institutions.

Mr Kenyatta said the overriding theme of the proposals in his economic stimulus package is to put extra money in the pockets of Kenyans and cushion the poor from the vagaries of the economic downturn.

His measures include a 100 percent tax relief for people earning a gross monthly income of up to Sh24,000.

This means those getting  Sh24,000 or less would be spared Pay-As-You-Earn (Paye).

The government also reduced paye for top earners from 30 to 25 per cent.

This measure, however, leaves out middle-income earners, who form the bulk of formal workers. These group earns Sh24,000 to Sh50,000.

President Kenyatta reduced Resident Income Tax or what is also known as Corporation Tax from 30 to 25 per cent.

Corporation tax is what companies pay after making profits.

This will allow companies save an extra five per cent of their profits that was initially going to the Kenya Revenue Authority (KRA).

But companies must first make profits before they pay corporation tax. Most are barely making enough to pay salaries.